GM, Ford bonds hit by Deutsche note

Analyst expects GM to be cut to 'junk' in 3 to 6 months

NEW YORK (MarketWatch) -- Bonds issued by General Motors Corp. and Ford Motor Co. were pummeled Friday after Deutsche Bank initiated coverage on each company's fixed-income securities, rating GM a sell and Ford a hold.

"Based on our outlook for worse than widely expected U.S. market share, severe profit deterioration from adverse mix, and limited near-term progress on fixed costs, we believe that the deterioration that we are likely to see in GM profitability and its balance sheet will be alarming to both equity and bond investors," analyst Rod Lache told clients.

Ford is not far behind GM as regards its battle to maintain market share, its strong reliance on traditional SUVs and large pickup trucks "and the resulting headwinds that the company faces from a mix perspective," said Lache.

'We believe that the deterioration that we are likely to see in GM profitability and its balance sheet will be alarming to both equity and bond investors.'
Rod Lache, Deutsche Bank

Ford does have a stronger balance sheet, however. Its car business is also healthier than GM's, placing it in a better position to benefit once industry pricing stabilizes, the analyst said.

For GM, the Deutsche Bank note comes just three days after Moody's cut its long-term debt rating to one notch above non-investment-grade, or "junk," status. Standard & Poor's and Fitch have similar ratings for the auto giant.

"While there is no question that the market is already factoring [in] further downgrades, we still believe that spreads have room to widen from here," said Lache, who expects GM's debt to be rated junk by one or more of the major rating agencies in the next three to six months.

With $200 billion in debt, a downgrade to junk status would significantly increase GM's financing costs.

GM's 8% bond due 2031 was last yielding 9.556%, according to corporate bond tracker Market Axess. Its spread -- or difference in yield to a comparable, lower-risk Treasury -- widened 10 basis points to 4.69% and is up 14 basis points in the month so far.

GM's 8.375% bond due 2033 was yielding 9.962%. Its spread widened five basis points to 5.19%.

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